Macau Gaming: Junket Incidents Sour Sentiments, Says Credit Suisse

By Shuli Ren

Last week, one of the principals of a small junket absconded with 8-10 billion Hong Kong dollars ($1-1.3 billion), reported Credit Suisse analyst Isis Wong:

One of the principals of a small junket, namely Kimren, was reported to have absconded with HK$8-10 bn on 19 April 2014. According to our channel check, most of the fund was from the sidebetting pool setting up by junkets, agents and other private investors. Kimren has presence in Melco Crown’s Altira, MGM and Galaxy Entertainment’s StarWorld.

Although the amount is relatively small for the Macau gaming market, the loss from the junkets’ working capital pool and more importantly the impact on sentiment (the junkets are likely to tighten credit extension to the agents and new clients) may slow down the velocity
of the capital and hence the VIP business.

According to Macau Daily Times on 23 April 2014, wife of Cheong Chitai, one of the owners of Neptune Group (top three junkets in Macau), was detained in Hong Kong with liquid asset to the amount of HK$200 mn frozen by Hong Kong police. The article further added that the investigators had compiled a list of 20 junket operators who are allegedly assisting corrupt mainland officials in money laundering and around 40 people connected with Neptune Group have allegedly been detained or questioned by HK police since the detention of Mrs Cheong.

However, according to Next Magazine, which broke the news, the arrest was not to choke off junket activities, or even money laundering, but to pressure junket operators into co-operation with Beijing’s anti-corruption drive:

However, according to “Next Magazine,” the goal of this move by the central government is not to eradicate money-laundering activities in the two SARs. Rather, the central government is trying to pressure junket operators into submitting more information pertaining to corrupt officials, so that it can further its quest to cleanse the ruling Communist Party ranks.

Junkets operate to serve the VIP segment, which by now is no longer the earnings driver in Macau. Last year, the VIP segment contributed to about two-thirds of the total revenue but only about 35% of the gaming profit. This year, the mass market segment continues to grow at a faster pace.

The potential deceleration in VIP GGR growth in the near term is likely to cap the share price performance, a scenario similar to 2012. Therefore, we suggest waiting for a better entry point. Sands China is our top pick.

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Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.